Goldman Sachs Group Inc. anticipates a challenging road ahead for India’s banking sector, forecasting a decline in returns on assets in the coming quarters.
Rahul Jain, co-head of Asia Pacific Financials Research at Goldman, highlighted that Indian banks experienced a favorable period in recent years, characterized by revenue growth and increased loan activity. However, this period of prosperity is now coming to an end.
Jain emphasized that tighter liquidity conditions and heightened scrutiny on unsecured lending are among the challenges facing banks. He noted the necessity for investment in expansion and capacity building to attract more deposits, which may not translate favorably to top-line growth.
Investors are advised to be discerning in their selection of Indian financial stocks, as per Jain. Goldman downgraded ICICI Bank Ltd., State Bank of India, and Yes Bank Ltd. in late February, reflecting a cautious stance on the sector.
Goldman has a “market weight” recommendation on India’s broader financial sector and has revised down earnings estimates for banks. Jain cited structural drivers for long-term loan growth but cautioned about near-term challenges, such as household debt levels and potential asset-quality issues.
Slower growth and revenue margins could result from asset-quality challenges as the credit cycle unfolds, Jain warned. This, in turn, would impact fee income and overall profitability for lenders.
Approximately 70% to 80% of Indian banks’ assets are funded by deposits, according to Jain. He noted that the loan-to-deposit ratio is at its peak, indicating slower growth prospects for the banking system.
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